IMF cuts global growth forecasts on China, US downgrades

The IMF is forecasting global growth of 3.4 per cent this year, with China and the US slowing.

Jonathan Ernst: Reuters

The International Monetary Fund has cut its global economic growth forecast for 2014 because of weakness in the world's two biggest economies.

The IMF says the global economy will grow by 3.4 per cent this year, down from its April forecast of 3.7 per cent.

The revision reflects a weak first quarter in the US which makes up almost a quarter of global GDP.

The IMF now expects the US economy to grow at 1.7 per cent in 2014, which would be the weakest rate since the country's recession officially ended five years ago.

That is down from its April prediction of 2.8 per cent, mostly because of a severe cold snap in the first quarter.

The US economy shrank at an annual rate of 2.9 per cent in the first three months of the year.

IMF chief economist Olivier Blanchard says it is unlikely that weakness will be repeated.

"It looks like a one off ... which is due to an unusually harsh weather," he said.

"So factors which do not have obvious implications for the future, but just explain why growth was so bad in that quarter."

The IMF's forecast for China has also been lowered to 7.4 per cent from 7.6 per cent, with problems in the country's housing market noted.

Among the so-called BRICS countries of Brazil, Russia, India, China and South Africa, India was the only one to avoid a downgrade.

Among those developing economies, the biggest reduction was for Russia's growth, as a result of investors pulling money out of the country because of its involvement in the conflict in Ukraine.

Russia's economy is now expected to grow at a rate of 0.2 per cent from 1.3 estimated previously.

Dr Blanchard says the IMF's Russia forecasts exclude the effects of recent sanctions the US has imposed on the country.

"These sanctions could probably further decrease the growth rate of Russia," he said.

The IMF said there were bright spots in the global economy which included growth pick-ups in Japan, Germany, Spain and the United Kingdom.

However, the fund says geopolitical risks from the crises in the Middle East and Ukraine could dent growth further and hinder the global recovery.

"Robust demand momentum has not yet emerged despite continued very low interest rates and easing of brakes to the recovery, including from fiscal consolidation or tight financial conditions," the IMF said.

Low rates safe

The International Monetary Fund has taken a side on the debate surrounding the effects of low interest rates on asset prices.

The IMF says record low interest rates in developed nations like the US are unlikely to lead to another financial crisis.

That is in stark contrast to worries expressed by the international body representing central banks, the Bank for International Settlements, recently.

The BIS says low interest rates are fuelling asset bubbles particularly on the stock market and they may burst with drastic consequences.

Dr Blanchard says the fund has a different view to the BIS.

"The reason we are not that worried is that this is happening in an environment where the leverage of the actors or the investors is not very high," he explained.

"So that even if there was an adjustment in stock prices it would not be catastrophic in the sense of leading to bankruptcies of financial actors."

The International Monetary Fund says slower global growth this year supports the case to keep interest rates low in developed economies.

Olivier Blanchard says the fund supports moves by the US central bank to stimulate the US economy with low interest rates and its bond buying program.

"We think the current plans, which is the end of tapering later this year and an increase in the policy rate sometime in the middle of next year, are appropriate plans based on what we know today," he said.

"But there is enough uncertainty that we should not be surprised if there was some adjustment which was made along the way."

Central banks in the United States, Japan, the eurozone and Britain have all cut interest rates to near record lows to boost economic growth, and have pledged to keep them there for as long as it takes for their economies to recover from the depths of the global financial crisis.